The Euro Exchange Rate climbed yesterday from its 20-month low after successful debt auctions in Holland and France

The euro climbed yesterday from the 20 month low it registered against the pound on Monday after the markets reacted positively to better than expected bond auction results from Holland and France following the difficult day the euro experienced at the beginning of the trading week.

The euro had been badly hit on Monday as markets reacted negatively to the results of the first round of the French presidential elections after incumbent President Nicolas Sarkozy lost to his socialist opponent Francois Hollande which will mean a run-off between the two men on 6 May. Economists and the credit ratings agencies are concerned about the language being used by Hollande who amongst other things has suggested that he may increase the minimum wage in France. This has been held unchanged for the last 5 years and any increase will further erode the competitiveness of the French economy and add to its debt mountain at a time when the euro zone is sorely struggling with the levels of debt accumulated by its economies.

The resignation of the Dutch prime Minister after his right wing coalition partners refused to agree to further austerity measures dealt a further blow to the euro zone as did poor bond auction results from Italy and Spain. Spanish 10-year bond yield rose above 6% again to 6.04%. Spain’s risk premium is now at 438 basis points while Italy’s is at 408bp compared to the cost of insuring German debt.

The International Monetary Fund weighed in to the ongoing debate by insisting that Germany should accept the issuance of Eurobonds, something that German Chancellor Angela Merkel will almost certainly decline.

The euro was helped by fresh weakness in the pound as it took a knock at the beginning of the trading day after data from the Office for National Statistics (ONS) showed that for the second month in a row, the UK government’s borrowing exceeded the previous year’s total. The UK government borrowed £18.2 billion in March, higher than the £16 billion expected by most analysts.

Total UK public sector borrowing for 2011/12 was £125.97 billion according to the ONS.

Samuel Tombs, UK Economist at Capital Economics, said March’s public finance figures suggested that the trend in the UK’s fiscal position was continuing to worsen.

Dr Howard Archer, Chief UK Economist at IHS, said the Chancellor would be waiting with baited breath for Wednesday’s first quarter GDP figures.

Across the pond, the US dollar fell after the S&P/Case-Shiller 20-city composite declined more than expected in February. The dollar was also hit after data from the Conference Board showed that its consumer-confidence index posted an unexpected decline in April.

Tonight sees the announcement from the Federal Open Market Committee. The Fed is expected by most analysts to repeat its plan of keeping the key US interest rate at ‘exceptionally low levels’ through at least 2014.

Overall, risk aversion continues to reign as the euro zone sovereign debt crisis continues to worsen and Chinese data points to a continuing slowdown in the Chinese economy.